Termination of Contracts During The Moratorium: Looking Beyond The ‘Going Concern’ Status

– Amrit Mahal

The resolution of distressed companies on a going concern basis is a cornerstone of the corporate insolvency resolution process (“CIRP”) introduced under the Insolvency and Bankruptcy Code, 2016 (“IBC”). This is critical to maintain the viability of the company, maximise the value of its assets and improve the likelihood of insolvency resolution. Section 14 of the IBC furthers this intent by instituting a moratorium from the date of commencement of the CIRP, until its conclusion. The moratorium prohibits persons in rem from undertaking certain actions against the corporate debtor, including the recovery of any property held by the corporate debtor and cessation of supply of goods and services critical for its operations.
The moratorium does not per se prohibit third parties from terminating contracts entered with the corporate debtor. However, insolvency tribunals have set aside the termination of lease agreements, supply contracts and other pre-existing arrangements with the corporate debtor, where termination would have the effect of breaching the moratorium or jeopardising the corporate debtor’s going concern status.
This paper examines judicial and legislative developments in the IBC in connection with termination of contracts from critical and comparative perspectives. The paper first examines the ambiguities in the scope of the moratorium provisions; and second, highlights that the IBC’s focus on the maintenance of the corporate debtor as a going concern often discounts hardships faced by contractual counterparties to the corporate debtor. Through a comparative study, the paper considers measures instituted in the United Kingdom and United States to balance the interests of such counterparties, while giving due regard to the overarching goal of insolvency resolution.